Confused about Mortgage PMI, LTV, HELOC & Appraisal...Please help!?

Question

I'm buying my first home (a tiny condo) and plan to put 15% down plus closing costs. I knew in advance I'd have to pay PMI due to having less than 20% down. My appraisal came in high making my LTV a bit over 75%. I was told that I still need to pay PMI because my LTV based on my purchase price is still 85%. Also, I wanted to get a small home equity line of credit. Based on my appraisal, I could get a HELOC, but based on my purchase price I cannot (they only go up to 85% LTV). What "value" will they look at for a HELOC? If I go to another lender for a HELOC after closing, will they look at my purchase price or my appraised value? Thanks in advance!

Answer 1

LTV is always calculated the Lesser of the Sales Price or the Appraised Value, so if you appraisal has a higher value but sales price is low the lender(s) will consider the lower one for calculating the LTV of the loan and you'll have to pay PMI if it goes above 80%. However once you start paying off the mortgage (Amortization Period) there are 2 ways to end your PMI:

1: Automatic: When the LTV of your loan reaches 78%. This would be due to the reduction of your outstanding loan balance through monthly mortgage payments. The Lender will automatically cancel the PMI when the your equity position reaches at least 22% in the subject property.

2: By Request: When the LTV on your loan reaches 80% (or less) through a combination of reduction of your outstanding loan balance and/or appreciation of the value of your home. Here you can request the Lender to cancel your PMI.


There is another way to stop the PMI on your loan, after a year or so you can go for a refinance on the loan. Probably the value of your home will not fall down by that time, so once you'll go for the refinance your LTV will be calculated based on the appraised value of the property and then if it is less than 80% you'll not have to pay PMI.


Regards
Sudhanshu Ohri